L.A. Beats Manhattan on Office Real-Estate Profits

I’ll take Manhattan, the old song goes, but when it comes to making a buck on office real estate, you might take West L.A.

Based on recent capitalization rates — net operating income as a share of the purchase price — office buildings in New York are overpriced by 20 percent, on average, compared with those in major West Coast markets, particularly West Los Angeles and downtown San Francisco. That’s according to a report by the real estate research firm Green Street Advisors.

What’s reducing relative demand on New York City’s isle of skyscrapers, long the U.S. office market by which all others have been judged?

New supply in areas such as Hudson Yards, on the far West Side, and downtown at the World Trade Center, for one thing. For another, financial-services companies, law firms and other traditional New York office tenants have been cutting down on space per employee, according to the report — the first in which Green Street uses a new tool to parse data down to the ZIP code. Add to that the pro-growth policies of public officials, including Mayor Bill de Blasio, who presided over last year’s rezoning of east Midtown for larger buildings, and former mayor Michael R. Bloomberg (founder and majority owner of Bloomberg News parent Bloomberg LP), in a city where building has historically been tough.

On that other coast, the very drawbacks of L.A. that fill tedious gripe sessions and standup acts — the sprawl, the clogged freeways, the wimpy public transit — have perversely made its westside office space more valuable by discouraging building, Green Street analyst Jed Reagan said. The Nimby effect is also a factor, as it is in downtown San Francisco.

The findings could ding such New York-centric real estate investment trusts as SL Green Realty Corp., Vornado Realty Trust and Boston Properties Inc. — already trading, in recent weeks, at a substantial discount to the value of their assets. The data could, in turn, further boost the value of Douglas Emmett Inc. The Santa Monica, California-based REIT, whose portfolio is roughly two-thirds in West Los Angeles, has been trading at a premium to its East Coast counterparts for some time, Reagan said.